As the euro plunged to new lows this week, the European Central Bank's (ECB) chief economist, Prof Otmar Issing, declared confidently that uncertainty about possible central bank interventions would frighten speculators off from driving the currency even lower.

"This effect could not be achieved if intentions to intervene were announced. This would lead currency speculators to ask at what exchange rate the central banks would intervene and that would be a direct invitation for speculation. Many central banks are contemplating when the right time would be to invest more heavily in European funds," he said.

Prof Issing believes a "herd mentality" has led the markets towards a serious undervaluation of the euro. What he omits to mention is that his boss, the ECB's president, Mr Wim Duisenberg, is partly responsible for driving the herd in the wrong direction - and at an accelerated pace.

Mr Duisenberg's error in blurting out information about the central bankers' intervention strategy not only precipitated the latest fall in the euro's value against the dollar; it also undermined his own authority, perhaps fatally.

Mr Duisenberg's fall from grace could yet lead to his removal from office before his planned retirement in 2002. But its most significant impact is likely to be on the debate about how economic policy is made in the euro zone, strengthening the hand of those who demand a bigger role for European finance ministers.

This argument has serious implications for Ireland because it could herald the harmonisation of economic policies - including tax rates - within the euro zone.

Mr Duisenberg's first public battle as ECB president was with the former German finance minister, Mr Oskar Lafontaine, who wanted more political influence over the bank's decisions. One of Mr Lafontaine's more controversial suggestions was that exchange rates between the dollar, the euro and the yen should be managed to prevent wild swings and overshoots such as the euro is now experiencing.

Mr Duisenberg won his battle against Mr Lafontaine, who has disappeared into the wilderness of an extended political sulk. But the former finance minister may have won the argument on managed exchange rates and support is growing for another of his demands - an economic government for Europe.

According to this thesis, the single currency has created a single economy and it therefore requires a single economic policy.

A glance at the economic figures is enough to show that the reality falls far short of this ideal. The rate of inflation in the euro zone ranges from 2 per cent in France to about 6 per cent in Ireland. Spain's economy grew by 4 per cent last year, compared to just 1.6 per cent in Germany. And the Dutch unemployment rate of 2.5 per cent stands in sharp contrast to the 11 per cent of workers without a job in Greece, which adopts the euro in January.

Euro zone member-states compete on tax rates and labour law and there was no sign of a co-ordinated response to the recent protests over oil prices. France, Belgium and the Netherlands cut fuel tax but Germany held firm while other countries offered a nod to the protesters that their concerns would be addressed in the next budget.

There has been a similar lack of co-ordination in granting third generation mobile phone licences, with Germany and Britain earning billions from lucrative auctions while Spain and the Netherlands offered their licences for a song.

Those who argue for greater co-ordination say several important policy areas are already integrated. The Stability Pact that preceded the euro's inception obliges euro zone member-states to balance their budgets in the medium term and punishes those whose deficits are excessive. The European Commission has the final say in mergers, takeovers and public subsidies to ailing firms and agricultural policy has been removed almost entirely from national governments.

Stefan Collignon, a senior adviser in the German finance ministry, believes the first step towards co-ordinating economic policy could be to beef up the eurogroup of finance ministers from the euro zone states.

"It would be very good for Europe if the finance ministers were to say, for example, what the inflation rate for next year should be like," he said.

Mr Duisenberg has consistently resisted any enhancement of the finance ministers' role, insisting that, as the self-proclaimed "Mr Euro", his voice alone should speak for the euro. But as Mr Euro's reputation tumbles with each drop in the currency's value, Europe's politicians are moving towards the view that, if they do not start working more closely together, there may be no limit to how far the euro - and Mr Duisenberg - can ultimately fall.